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Bill Black: Administration and Congress not willing to break up big banks or control exec. compensation

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. The finance reform bill has passed both houses. President Obama is expected to sign it soon. Now joining us for his take on the finance reform bill is Bill Black. He’s an associate professor of economics at the law school at the University of Missouri–Kansas City, he’s a specialist on white-collar crime, and he’s the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.


JAY: So let me just quote to you what Heather Booth said. She’s the director of the National Coalition of Americans for Financial Reform. She says, quote, “We were outmatched 300-1,” meaning in lobbying, “but the bill became stronger as it worked its way through the process.” This shows, “with well-organized people and committed leadership, things can move in the right direction.” And this is in an article that’s headlined “[Reformers] celebrate rare victory over entrenched special interests”. So is this a victory?

BLACK: Well, there is some important truth to what she says. It is true that they were outmatched, that virtually all the lobbying was to weaken the bill. And it is true, as [Chris] Dodd has said and others, that they were told that provisions like this could never become law, that the special interests would defeat them. So what you have seen is something really important. This obviously didn’t come from the lobbyists. What this came from, the strengthening of the bill, was the fact that overwhelmingly Americans get it right and overwhelmingly the administrations get it wrong. And when I say they get it right, the public understands that there is a real crisis, the public understands that you need fundamental change, the public understand that this is a crisis of our elites and in many cases fraudulent elites, and the public is outraged and wants action. The problem is that the bill has next to nothing to do with the causes of the crisis. And so if it had been fully enacted ten years ago, it wouldn’t have prevented the current crisis, and it won’t prevent future crises. And that you can’t blame on the public but you certainly have to blame on the framers of the bill, who aimed so low and at targets that hadn’t caused the crisis that even if they’d gotten everything they’d asked for, the bill would have been terribly unimportant, and indeed in some ways harmful. This is in great distinction to what happened in the Great Depression. In the Great Depression, we actually examined what had caused the crisis, and we adopted legislation that was designed expressly to deal with those frauds, to deal with those conflicts of interest, and that legislation worked brilliantly for 35 years after it was adopted.

JAY: Okay. Now be specific, because the people that are calling this a victory are saying that it has dealt with these issues. In fact, we’re hearing that too-big-to-fail has been solved, that the public won’t be held up again. There’s a whole range of consumer protection. Is this not true?

BLACK: Let me go through the specifics of this. And, again, you’ve got to start with what caused the problem and what they claimed the bill was going to do. So I heard President Obama say the passage of this bill ensures that there will never again be a public bailout of failed financial institutions.


PRES. BARACK OBAMA: There will be no more tax-payer funded bailouts, period. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy.


BLACK: Now, that is nonsense. There is nothing in the bill that will prevent that. Actually, there’s nothing in any bill that really could ensure that you would never have those circumstances. But let’s go through it. Some people believe that this is a crisis caused by the systemically dangerous institutions and that the failure of one of these systemically dangerous institutions, Lehman Brothers, led to a crisis. And I think it’s bad analysis, but let’s take that one first. The bill doesn’t deal with the systemically dangerous institutions. It allows them to continue. And there is no sign that the Obama administration—and, of course, the Bush administration before it—would have ever used the potential authorities in this bill to close a single one of the insolvent massive institutions. Instead, both the Bush and the Obama administration have deliberately scammed the accounting rules with the aid of the—now, this is strange bedfellows—the Chamber of Commerce, of all folks, so that the really big banks don’t have to recognize their losses, and so that both the Bush administration and now the Obama administration can evade their legal duty under the Prompt Corrective Action law to close these institutions. So what was created? What was created instead is we can now deal with a systemically dangerous institution, but only if we can prove that it poses a, quote, “grave risk”, unquote, to the entire financial system. And no one believes that the Obama administration is going to use that authority to close a single one of these systemically dangerous institutions, and obviously the Bush administration didn’t. Again, we know this because the existing law provided ample authority to break up any of these massive banks or to put them into receivership, and both Republicans and Democrats have refused to do that. So if your worry is systemically dangerous institutions, this bill doesn’t address that at all. If your worry, like—and this is the worries that I have—is that we had systemically perverse incentive systems that explain why we have recurrent financial crises, then the bill does not deal with the key things creating these perverse incentives. What are those key things? They are two primary areas. One is executive compensation. And this—let’s start with why executive compensation. It isn’t so much the dollar magnitude of the compensation. It’s the fact that it is tied to short-term reported income or it’s not tied to any performance measures all. It just guarantees that CEOs can blow up the bank and get enormously rich. Now, that is insane under conservative economic theory. Conservative economic theory predicts that if you tied executive compensation to short-term accounting earnings, you will produce a disaster. What’s happened since the crisis? Well, we have data on this, and what the data show are that executive compensation has become even more weighted toward short term. So this is the fundamental driver of why fraud pays, and in particular, accounting fraud pays enormously. This is why the executives of these failed banks are able to walk away extraordinarily rich men and, very rarely, women. Nothing in the bill addresses this central, perverse dynamic, which would be the first place you would start if you’re serious about preventing future crises.

End of Transcript

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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.